Sunday, March 09, 2008

SUMMARY:- NASDAQ sells below January lows then market covers ahead of the weekend- Jobs report continues the string of bad economic data- Fed sense of timing second only to - Looking for a few good stocks . . . to hold the line.

Bad news provides a platform to sell, and stocks do, but it is not the rout needed.

The jobs report was weaker then expected but in line with what should have been expected given the weekly jobless claims and flagging economic data the past two months. That was a surprise to investors yet not; the market was getting used to worse than expected data during its lateral range; thus more bad news is not really surprising even though of late it has started to break the camel's back as the indices sell lower.

As if that was not enough, the Fed announced it was raising its TAF (a.k.a. Taffy) auction amounts to $100B and is taking a lot more different kinds of securities with a 28-day turn versus overnight. I have a few obsolete computers and printers I want to unload; wonder if the Fed would take them now? After all they seem to be bent on doing anything in the hope that it will in somewhat help alleviate the once again increasing spreads in corporate bonds and the lack of interest in commercial paper. If I could get rid of those old computers I know the markets would start to calm down.

What the Fed is doing is not a bad idea; it cannot continue running rates down at 50 to 75BP pops and expect to end the credit issues on its own. As discussed last week, the last time this scenario started to unfold the response that worked involved fiscal stimulus in the right places and some higher interest rates. If the Fed had some real help instead of the $600 handouts that worried consumers will save instead of spend (or they spend it on $3/gallon gasoline) it could concentrate on its TAF-like programs that don't fuel inflation as directly as tax cuts yet get money into the system. It worked initially, but the need for more rate cuts worked to undo the narrower spreads and lower LIBOR rates initially achieved. Without the real help it needs from the fiscal side (as evident by the way the market responded to the fiscal stimulus, i.e. selling further) the Fed is locked into its course of action as it has to promote economic growth and stabile prices. It can sit and do nothing or it can try to use the tools it has and Bernanke's speeches pre-Fed indicate that he will act versus sit.

Timing is everything, however, and this action, as the 75BP cut on the heels of the market dive in January, looks to be reactionary as opposed to calculated. Thus over the past couple of weeks the talk has switched to how the ECB is more in control and resolute in its plan of action than the US Fed. As with professional sports fans, monetary policy is a 'what have you done for me lately' game. Friday it looked once more as if the Fed was chasing a bus. Not very dignified considering all of the academic firepower on the committee.

Nonetheless, after a weaker open stocks rebounded in the first hour, turning from negative to positive across the board. We didn't think that would last. The early downside should have been worse but it was not. There was no real spike in fear and the early selling was not ferocious. After that initial rebound a 4 hour selloff ensued that took the indices to new session lows. The Dow came within 200 points of its January low, SP500 just 12 points, while NASDAQ undercut its January low by 15 points. We watched the indices rollover, but anticipated a bounce on some short covering ahead of the weekend given two big back to back downside sessions. When we saw the Russell 2000 hold its early session lows after the other industries undercut, we figured the short covering bounce was read to start. We issued some alerts to take some gain on the downside positions and then watched the market rebound. NASDAQ turned positive; an undercut of support to green. It did not completely stick, but the indices did bounce off the lows.

TECHNICALLY it was not the blowout downside session we were looking for. The market started lower then recovered with relative ease, turning positive midmorning. It did not hold the gains and sold off to new session lows, but it bounced again in the last hour. Did not turn positive but the short covering move ahead of the weekend took some of the downside pressure off. In short, no downside blow off, just more selling that did not provide the catharsis the market needed to put in a bottom.

INTERNALS: The internals were not at the massively negative levels of Thursday with breadth at a more palatable -1.8:1 on NYSE, -1.6:1 on NASDAQ. Volume was up and back above average on both NYSE and NASDAQ. Makes sense that the volume was up on the sorry jobs report, but it was more distribution as the market sold lower. That indicates more selling to come with SP500 and DJ30 heading down toward the January intraday lows.

CHARTS: The big move of the session was NASDAQ undercutting its January intraday lows, then rebounding to hold over those levels. Some will calls this a 'successful' test of the January lows and it may turn out to be that. With SP500 and DJ30 still above those lows, however, NASDAQ is likely going to at a minimum have to wait for them before it can try a sustained upside move.

LEADERSHIP: There was not a whole lot of leadership, at least in terms of stocks posting solid upside gains. There were stocks that showed relative strength, i.e. holding position above near support, weathering the selling, hunkered down and waiting for the test to end and trying to hold support all the while. Indeed those are the stocks we are looking for at the end of this selling; if they are still holding up or are at key support and in buy positions after SP500 and DJ30 test their January lows, then we can look at them to at least play to the upside when the market makes the bounce off of that test. There will likely indeed be a bounce off that move even if the market ultimately sells further, something that is hardly out of the question given the continued weakening economic data and the market's resumption of the downside.

THE ECONOMY

February jobs report posts first back to back declines since early 2003.

The last time the jobs report posted its first 2 consecutive months of declines the US economy was in recession. It was not officially known at the time, but recession was upon us when that report hit. Thus just as then, we are likely in recession given the varied issues facing the economy (housing, credit issues, $100+/bbl oil), the train of falling economic data, and the selling in the market that is forecasting the recession.

The numbers: non-farm payrolls fell 63K, a swing of 88K from expectations at 25K. Hourly earnings were in line at 0.3%, matching the 0.3% rise in January. Private payrolls fell 101K while government added 38K. Services fell 12K well down from the 100K average in Q4. Construction fell 39K and manufacturing fell 52K.

The unemployment rate actually fell to 4.8% from 4.9%. Now when the economy was turning up, the unemployment rate, also known as the household survey (are you working or are you not?) was falling even as non-farm jobs were falling. In other words, the household survey showed more people were working despite what non-farm payrolls said because after the implosion in tech, many people started their own businesses because the big companies were laying off all through the recession and the start of the recovery. Thus in order to put food on the table a lot of former employees turned entrepreneur. Thus the falling unemployment rate was an indication of a recovery in progress.

Does it mean the same this month? No. What pushed the rate lower was an exodus from the jobs pool. The labor force contracted 450K in January. If enough workers give up and leave the work force, i.e. more than the number of lost jobs, then it can look as if the unemployment rate is improving. In that situation, however, all it means is that people are giving up for now and collecting unemployment. Look at the weekly jobless claims trend; it tells that tale.

Earnings versus unemployment rate show an interesting trend. When you chart hourly earnings versus the unemployment rate over the past 20 years you see they move inversely. When hourly rates peak unemployment rates trough. Over the past two quarters hourly earnings growth matched the rates hit in 2001. At the same time the unemployment rate hit its lows both then and now. Hourly earnings are starting a decline the past three months and the unemployment rate has started to creep higher. The recovery starts in earnest soon after the unemployment rate peaks and the hourly rates drop sharply. While both are starting to move in that direction they have not made definitive moves. Thus we are likely to see more of the same movement in these numbers over the next few months before they make the turn. As discussed all last week, however, the market will turn before. Thus after a run lower once more that has the DJ30 and SP500 test the January lows and likely a bit lower.